Price discrimination means charging different prices from different customers or for different units of the same product. In the words of Joan Robinson: “The act of selling the same article, produced under single control at different prices to different buyers is known as price discrimination.” Price discrimination is possible when the monopolist sells in different markets in such a way that it is not possible to transfer any unit of the commodity from the cheap market to the dearer market.
Price discrimination is, however, not possible under perfect competition, even if the two markets could be kept separate. Since the market demand in each market is perfectly elastic, every seller would try to sell in that market in which he could get the highest price. Competition would make the price equal in both the markets. Thus price discrimination is possible only when markets are imperfect.
Firstly, it may be personal based on the income of the customer. For example, doctors and lawyers charge different fees from different customers on the basis of their incomes. Higher fees are charged to rich persons and lower to the poor.
Secondly, price discrimination may be based on the nature of the product. Paperback is cheaper than the deluxe edition of the same book, for the former is bought by the majority of readers, and the latter by libraries. Unbranded products, like open tea, are sold at lower prices than branded products like Brooke Bond or Lipton tea.
Thirdly, price discrimination is also related to the age, sex and status of the customers. Barbers charge less for children’s hair-cuts. Certain cinema halls admit ladies only at lower rates. Military personnel in uniform are admitted at concessional rates in all cinema houses.
Fourthly, discrimination is also based on the time of service. Cinema houses at certain places, like New Delhi, charge half the rates in the morning show than in the afternoon shows.
Fifthly, there is geographical or local discrimination when a monopolist sells in one market at a higher price than in the other market.
Lastly, discrimination may be based on the use of the product. Railways charge different rates for different compartments or for different services. Less is charged for the transportation of coal than for bales of cloth on the same route. State power boards charge low rates for industrial use than for domestic consumption of electricity.
Price discrimination is possible when there is some degree of market imperfection. The individual seller is able to divide and keep his market into separate parts only if it is imperfect. Customers do not move readily from one market to the other because of ignorance or inertia.
Price discrimination also takes place when the seller of a commodity is a monopolist or when rivals enter into an agreement for the sale of the product at different prices to different customers. This is usually possible in the sale of direct services.
Discrimination may occur on geographical grounds. The monopolist may discriminate between home and foreign buyers by selling at a lower price in the foreign market than in the domestic market. This type of discrimination is known as “dumping”.
Discrimination is possible when buyers need the same service in connection with differentiated products. Railways charge different rates for the transport of coal and copper. For they know that it is physically impossible for a copper merchant to convert copper into coal for the purpose of transporting it cheaper.
Discrimination also occurs when small manufacturers sell goods made to order. They charge different rates to different buyers depending upon the intensity of their demand for the product. Shoe makers charge a high price for the same variety from those customers who want them earlier than others.
A monopolist may create artificial differences by presenting the same commodity in different quantities. He may present it under different names and labels, one for the rich and snobbish buyers and the other for the ordinary. Thus he may charge different prices for substantially the same product.
For price discrimination, the demand in the separate markets must be considerably different. Different prices can be charged in separate markets based on differences of elasticity of demand. Low price is charged where demand is more elastic and high price in the market with the less elastic demand.